Spending cut, shifted for $1.5bn surplus

A $1.5 billion hit to the public service, a $700 million cut to tax breaks for executives working away from home and a cut to the baby bonus heralding the start of cutbacks to middle class welfare are among $6.8 billion of spending cuts outlined in the mid-year review of the budget.

Related Quotes

Company Profile

“What’s going on in Europe is just a reminder to us that we’ve got to strive even harder to do better."

But the surplus will reflect a massive tightening in fiscal policy, as slumping revenues, higher natural disaster payments, upfront assistance to households for the carbon price, and apparent reordering of spending commitments will see the budget deficit for the current financial year blow out to $37 billion from the $22.6 billion forecast at budget time.

“We’ve taken the middle path between those who say we don’t need a surplus and those who say we should take a really big axe to spending," Mr Swan said.

“We’ve got the big calls right in the past and we’ll keep getting them right."

Between 5000 and 6000 public service jobs could go as a result of a decision lift the efficiency dividend in government departments to a whopping 4 per cent next financial year, saving $1.5 billion over the forward estimates. The government insists smaller cultural and indigenous agencies – such as the War Memorial – will be exempt, heading off a new brawl with the Greens.

The budget review contains revisions to growth and unemployment forecasts for the Australian economy. The growth forecast for the current financial year has been cut from 4 per cent in the May budget to 3.25 per cent, and to 3.25 per cent in 2012-13, from 3.75 per cent in the budget.

Unemployment is forecast to be slightly higher at 5.5 per cent in 2011-12 and 2012-13 (from the current level of 5.2 per cent), an outcome Mr Swan described as “regrettable".

“They are expecting us to believe they are going to have a $38 billion turnaround in the budget in 12 months in the face of slower economic growth in Europe, slower economic growth in China and an anaemic United States economy," shadow treasurer Joe Hockey said on Tuesday.

“They expect us to believe that they will deliver a miraculous surplus even though they are increasing their own expenditure by their own policy decisions."

The government is forecasting it will save $682 million over four years by cracking down on living away from home allowance tax concessions, which it says are being rorted by foreign workers and highly paid executives.

It appears middle class welfare is now being wound back. The government will lift the eligibility age for the dependent spouse offset (available only to spouses without children) to spouses born before 1952 (i.e. eligible only for spouses now 60 or older) – saving $370 million over the forward estimates.

The baby bonus will be cut from $5400 to $5000 from September 1, 2012, and indexation will be paused for three years from July 1.

Charges for some visas for non-residents coming to Australia will be increased. The government says Australian taxpayers are subsidising visa applications – saving $613 million over the forward estimates.

Despite its gloomy forecasts, and pruning back its own forecasts for the Australian economy, the OECD advised the Government to stick to its budget strategy.

Australia’s “stringent spending control, consistent with the government’s plans, is still necessary to offset the revenue declines induced by the financial crisis and natural disasters", it said in its latest economic outlook.

This comes on the same day that Fitch has put the US on a negative watch. This endorsement marks the first time in Australia’s history it has had a AAA rating from all three ratings agencies (Standard and Poor’s, Fitch and Moody’s).